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Magnum Hunter Resources Corporation (NYSE:MHR)

Q3 2012 Earnings Call

November 13, 2012 8:30 am ET

Executives

Gabe E. Scott – Vice President Capital Markets and Corporate Development

Gary C. Evans – Chairman of the Board & Chief Executive Officer

Ronald D. Ormand – Chief Financial Officer, Executive Vice President & Director

Analyst

Hsulin Peng – Robert W. Baird & Co., Inc.

Bryan Singer – Goldman Sachs

Kim Pacanovsky – McNicoll, Lewis & Vlak

Jeffery Hayden – KLR Group

Ryan Todd – Deutsche Bank

Neal Dingmann – Suntrust Robinson Humphrey

Irene Haas – Wunderlich Securities, Inc.

Stephen Berman – Canaccord Genuity

[Yiktat Fung] – Jefferies & Company

Richard Tullis – Capital One Southcoast, Inc.

Kyle Rhodes – RBC Capital Markets

Operator

At this time I would like to welcome everyone to the Magnum Hunter Resources third quarter 2012 financial and operating results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Gabe Scott.

Gabe E. Scott

This is Gabe Scott and I’d like to welcome everyone to Magnum Hunter Resources third quarter 2012 financial and operating results conference call. The purpose of today’s call is to discuss our third quarter 2012 and nine months ended September 30, 2012 financial and operating results among other matters of interest regarding the company. Before beginning our presentation I’d like to advise you that today’s call may include forward-looking statements within the meaning of Section 28(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934.

Our presentation may include statements regarding our expectations, beliefs, intentions, or strategies regarding the future. Such forward-looking statements may be related to, among other things, the company’s proposed exploration and drilling operations, production and revenue from its properties and estimates regarding reserve potential. These statements are qualified by important factors that cause actual results to differ materially from those reflected by the forward-looking statements including those factors set forth in the risk factors section of the company’s 2011 annual report on Form 10K as well as the company’s first and second quarter 2012 quarterly reports on Form 10Q.

Our 2011 annual report also includes a glossary of certain industry terms that may be used in today’s conference call. The full forward-looking statements disclaimer is included in the company’s third quarter 2012 financial and operating results press release dated November 13, 2012 which is posted on the company’s website under press releases. This disclaimer is in effect for the duration of this conference call.

I’d now like to turn the meeting over to Gary C. Evans, our Chairman and CEO.

Gary C. Evans

We announced our financial results for the three and nine months ended September 30th this morning. We had previously announced our operations under our press release and call we did October 24th. This is a financial call today and we can obviously reiterate some of the operations that we discussed at that prior call. The company’s financial results continued to improve. Total revenues were up right at 150% at $70 million for the three months ended September 30th. That’s up just $28 million from the prior three months of last year.

But more importantly than revenue are operating margins and we’ve continued to be able to drive down our lease operating expenses which declined approximately 30% from $15.55 per barrel to just under $11 per barrel, $10.95 per Boe. This is due to the growth of the company and our ability to continue to try and maintain and administer the cost in the field. At the same time our general overhead expenses which is covered in our G&A declined 48% from $15.36 a barrel down to $8.15 a barrel.

So as the life of any junior oil and gas company goes as you increase production and your scale, you’re able to drive down those costs that allow you to improve your margins. We also though had a significant increase in EBITDA. EBITDA increased over 290% from $10.4 million for the three months ended September 30 of last year to $40.5 million or $0.24 per share. We’re very pleased with the results.

Even though production wasn’t where we expected for the third quarter we still are reiterating our exit rate of 18,500 Boe per day. We have some wonderful new wells we’ve been putting on here recently. A very nice new well in the Eagle Ford called the Bertha that was put on just in the last couple days at over 1,600 barrels a day just on a 16 inch choke.

As we’ve kind of told the street we’ve been hampered in 2012 due to the delay in getting this MarkWest Mobley plant up and running. Originally it was anticipated to be up and running in June, there were substantial delays in that. We’ve been told November and now it’s like the first week or 10 days of December. So we have planned our drilling and our completion efforts around this date. We have a number of wells already drilled in the Marcellus both by us and Stone Energy where we’re 50% partner. They’re awaiting completion because we do not want to lose that liquids value that these wells have that is so valuable to us.

That’s where the big shot in the arm is going to be coming in the month of December and where our exit rate will be. Also, our activities up in the Williston Basin continue to be extremely exciting. We’re producing over 5,000 barrels a day is in the Williston Basin now and over 3,000 barrels a day in the Eagle Ford and that’s just consistent growth with both wells in the table end field and wells in Divide County North Dakota. So we continue to spend money prudently. We spent $120 million during the three months ended September 30 which included over $107 that was in the upstream, about $13 million in the midstream and of that $10 million was spent on wells that we drilled that have not yet been completed as I mentioned up in the Marcellus.

One thing I think that is a testimony to the kind of growth the company is bringing to its shareholders is the fact that our borrowing base increased by $115 million from $260 to $375, that’s a 44% increase just here in the last week and that’s due to this growth that will be reflected in future quarters to come. So we continue to build this foundation of unconventional resource properties, as I mentioned in the quote today, and we are anticipating a very exciting 2013 with a big focus in the Marcellus Utica. We’ll be drilling our first Utica wells in the first quarter of 2013 and we’ll have our pipeline with processing fully up and operational and be able to receive all the benefits that entails.

We believe that Magnum Hunter is poised to really tell the market as I mentioned in my quote rather than show me the market, this is – we’re living in some unusual times with respect to market values of companies. I’ve been in this business 30 something years, I’ve never seen a company have such a disparity between its net asset value and its market value and so we’re doing everything we can to prove that. We’ve mentioned that we may actually be selling some of our divisions to realize that value, allow us to pay down debt and fund some future growth and those activities continue to take place.

I would like to turn the call over to Ron. Ron Ormond, is our CFO and he’s going to talk a little more specifically about some of the events that occurred this year and our change in account firms and what have you.

Ronald D. Ormand

The first thing I wanted to mention, I know a number of people were asking about additional financial information. We will be filing that in our 10Q here in the next day or so. As Gary mentioned, we did change – this is our first quarter with Price Waterhouse and we went through a very extensive review, I would call it more of an audit and therefore the numbers that we have here we feel obviously, very, very comfortable with but it took us a couple of extra days to get the Q and all of that filled out. So we’ll have that to you as quickly as we can and it should be in the next day or so.

Just going down through some of the detail, as Gary mentioned, revenues were up 149%, $69.8 million compared to $128.1 million in our second quarter 2011. Actual loss was $0.25 versus $0.02 in the third quarter last year. Recurring net loss was approximately $0.08 netting out non-cash non-recurring expenses of about $28 million and the detail is provided in the press release. Operating margins again, as you see a nice decline from last year were about $10.95 per Boe I think that’s an interesting data point given that our production has risen to about 55% oil now and our recurring cash G&A declined 50% from last year up sequentially slightly in this quarter primarily due to some of the expansion that we’re doing in some of the administrative areas and also in the accounting area.

Production was up about 137% over last year so I’m not sure there are a whole lot of companies that can say that. That was with about 1,900 barrels a day or so shut ins. So we had [12,480] Boe a day. It would have been about 14,145 with the curtailments. Today’s production is on a pro forma is about 15,750. That’s the number we would expect once the Mobley plant comes on.

In addition we have about 1,500 barrels a day of natural gas liquid that will commence production at that time once the Mobley plant is on. So I think you see a pretty clear path how we get to the 18,500 exit rate and beyond at the end of 2012.

For the nine months revenues were up 160% to $187 million versus $72 million in 2011. Recurring net loss in the nine months is $0.14. We had non-cash charges of roughly $58.7 million. Again, decreases in both LOE down from $14 to $10 and recurring G&A for the nine months was $6.83 versus $14.66. Adjusted EBITDA was $113.6 million and I think I mentioned in the first quarter it was roughly $40 million so I put this on an annualized EBITDA of about $240 million. We expect that number to increase by about 20% to 25% on an annualized basis in the fourth quarter of this year.

What we’ve done even though our production growth is not growing, what we are doing is growing our liquids production quite significantly so you’re seeing our revenues and our cash flow grow substantially. We also announced today an increase in our borrowing base which increased our facility from $260 million to $375 million so that gives us about $200 million of liquidity pro forma year end and currently about $150 million liquidity for this year and going into next.

I guess with that Gary I’ll turn it back to you.

Gary C. Evans

Operator, I think we’re ready now to turn the call over to our listeners who may have questions for us.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Hsulin Peng – Robert W. Baird & Co., Inc.

Hsulin Peng – Robert W. Baird & Co., Inc.

Just a clarification, regarding 1,500 Boe a day contemplated for the Mobley processing plant because you also talked about drilling additional wells from the additional cap ex, now is drilling from the additional cap ex, the production stream that comes on, will that be more for fourth quarter or is that for first quarter ’13? The reason I’m asking is because I want to make sure the Mobley plant can handle all the additional volume that you are currently waiting for and also will bring on.

Ronald D. Ormand

First off, I think that the volumes there are a couple of pieces to it. First off, we have about 1,800 barrels a day that’s shut in. That will go into the Mobley plant. 1,500 barrels a day liquid that’s stripped from our existing production that will go in and then the additional wells that Gary’s talking about are in addition to that. So we have three 100% wells and approximately five 50% wells. The Mobley plant has a capacity of 200 million a day of which we have reserved between Triad and Eureka a 100 million a day. So your answer is we have plenty of capacity in the Mobley plant to immediately produce our volumes.

Hsulin Peng – Robert W. Baird & Co., Inc.

The second question is can you just give us an update for your Utica joint venture and also on the potential Eagle Ford asset monetization.

Gary C. Evans

In the Utica we have a bank that we hired that took us over to Asia a couple of months ago and we continue to have a lot of meetings with potential foreign partners there. As time has gone by more wells have been drilled near our acreage. We obviously announced the Virco transaction which improved our acreage position significantly in this area and we’re planning to drill our first well with or without a partner. We’re fully funded to be able to do that ourselves. I don’t really have anything to update you there as to a specific time. We are taking our time because things are getting better with respect to that and so we’re showing it to more parties.

With respect to the Eagle Ford we have another bank and a data room in Houston. We are very active showing the Eagle Ford to various parties and I think we’ve shown it to over 15 companies now. We’ve got a very interested group and I would image that we would have some understanding of maybe what we do there I would say by the end of the year. That’s kind of the game plan there. I think the fact that our acreage position is so concise, 26,000 we’ve got great success continuing to put on some of the best wells in the play is making it very attractive to parties.

Hsulin Peng – Robert W. Baird & Co., Inc.

The last question and then I’ll let someone else jump on is regarding your volume base increase, that’s on reserves and stuff on which date and does that include the recent Virco acquisition, and when is the next redetermination?

Ronald D. Ormand

The production that we gave you for current production includes Virco. I didn’t understand your second question.

Hsulin Peng – Robert W. Baird & Co., Inc.

I was asking more on volume base, does that include reserves, and does that include recent acquisitions and also which date is the reserves based on that were entered in the volume base?

Ronald D. Ormand

It’s based on September 30 and it includes a very small amount, $10 million to $15 million for the acquisition and will again be determined at year end because a key thing to remember, which I didn’t say earlier, is those liquids which we talked about will come on production, those will all go into PBP and will allow us to move those numbers into the PBP category. We’re not able to book those until we’re actually producing them. The proof behind pipe at this point in time and then we’ll be getting credit for all of that at the end of the year.

Operator

Your next question comes from Bryan Singer – Goldman Sachs.

Bryan Singer – Goldman Sachs

I just wanted to follow up on the 1,500 barrels a day. Is that just the upside that you see from your current Marcellus production and that becomes the starting point, and what do you think the ultimate liquids upside is as it stands today from a Boe perspective would be from the Mobley plant?

Ronald D. Ormand

Well that’s just off our current production. In terms of the upside that we see for next year, I don’t know Gabe can you comment in terms of what we’re looking at NGLs per Boe per day next year?

Gabe E. Scott

It’s well about 2,500 barrels a day I’d say.

Gary C. Evans

That’s correct.

Bryan Singer – Goldman Sachs

You made a point on your call and you put in your release as taking appropriate steps to realize the true value of unconventional assets. Was that just in references to the two processes you just talked about the Utica and Eagle Ford or is there more that’s being considered?

Gary C. Evans

There’s more that’s being considered.

Bryan Singer – Goldman Sachs

Can you add any more color on that?

Gary C. Evans

I really can’t. We’re having meetings with other parties about other ways to realize greater value in some of these unconventional resource plays and they’re just still in the discussion phase and meeting phase so it would be inappropriate to say anything at this point.

Bryan Singer – Goldman Sachs

Lastly, I apologize if you mentioned it or hadn’t, but what was your net debt at the end of the quarter?

Ronald D. Ormand

It would have been on $175 on the facility plus $450 on the bonds.

Operator

Your next question comes from Kim Pacanovsky – McNicoll, Lewis & Vlak.

Kim Pacanovsky – McNicoll, Lewis & Vlak

Could you comment on the third Mobley plant that MarkWest talked about? Do you actually have capacity reserved on that third plant? I know the second plant is equitable and the third plant I think would be open for anybody?

Gary C. Evans

Actually the three plants are the first plant is Equitable 120, the second plant is 200 but the 200 is going in is going live before the 120 and then the third plant is another 200 and it is more open. I think Equitable has already committed to a piece of that and I think they’re talking to [Entero] for a piece of that. We’ve committed for the entire 200 of our plant which is really when I say we that’s Eureka, Hunter, Triad and Stone because we have interest in those wells. So we’ve still got a lot of room to go with respect to filling up that entire 200 so at this point we haven’t made any new commitments for the new plant.

Kim Pacanovsky – McNicoll, Lewis & Vlak

Gary, could you break up the new cap ex program for 2013 with the increase?

Gary C. Evans

We haven’t formally approved it with the board but I would say it’s going to be something similar to 2012. Something in the $325 to $350 range.

Ronald D. Ormand

I think that’s also subject to some of the things we’re considering in terms of strategic options, liquidity and additional capital coming in. So we haven’t formalized that process yet due to that.

Kim Pacanovsky – McNicoll, Lewis & Vlak

Speaking of some of the things that you’re working on can you just give us a number for Eagle Ford production as of today or end of month?

Gary C. Evans

I looked at it last night and it was like 3,200 barrels.

Kim Pacanovsky – McNicoll, Lewis & Vlak

Finally, one other quick one, were there any other accounting deficiencies that were identified by Price Waterhouse as they’ve gone in and dug through your numbers?

Ronald D. Ormand

I’m glad you asked that I meant to address that earlier. The accounting deficiency was frankly a human mistake in the second quarter were we under booked compensation expense. So they’ve gone back and looked at all of our bookings. We will have just some reclassification but there is no impact on P&L going forward. We’ve looked at everything in the shareholders comp, looking at properties, looking at our preferred which we’re going to book a little bit differently that’s why we need a reclassification but from an earnings and cash flow standpoint no changes other than the shareholder comp issue that I mentioned to you.

Gary C. Evans

It’s important to note that that shareholder comp issue was a non-cash issue. It was stock options that were not properly expensed as a non-cash matter. So even though we filed the [10QA] and there was a lot of debate about whether that was even necessary between accounting firms, but we chose to go ahead and file it. So because of that and because of the new accounting firm we have been scrubbed from A to Z and the items that have caused us to ask for the five day extension on filing the Q are strictly balance sheet matters. The income statement matters are miniscule so it has really to do with the preferred we did with ArcLight on the Eureka Hunter subsidiary and just some very minor things like that. So it has to do a lot with theoretical accounting. Unfortunately, our government has gotten so involved in how we book and do things that we have PhDs working 24 hours a day doing theoretical analysis of how something should be looked at.

Our listeners should be comfortable that we’ve been scrubbed from A to Z. We basically have gone through an audit in the last two weeks and so the numbers are clean and there are no unusual items and there is no issue for somebody to be concerned about.

Ronald D. Ormand

It’s been about a two month process actually. But, it’s not a formal audit to be specific, it’s classified as a review but in terms of process it’s about as close as you can get. So we feel very good where we are and obviously going into the yearend we have made this change and I think everyone can be extremely comfortable. I think we’ve also made changes in our internal processes. We brought on a new chief accounting officer in the last two weeks. We are bringing on a new assistant controller. We’ve added someone new in the stock comp area and financial reporting to really beef up not only the number but the experience level in those areas.

Also, what we are doing is utilizing more, as Gary mentioned, these PhD offsite consultants to do some valuation work which is unfortunately now requirements of the SEC and accounting firms. So it does cause an impact to G&A but you can be comfortable we’ll be fully complying with accounting and SEC guidelines going forward.

Kim Pacanovsky – McNicoll, Lewis & Vlak

How comfortable are you with the startup date for the Mobley plant?

Gary C. Evans

That’s a great question. We monitor it every week and we have people out there and the excuse for the delay from November to December was Hurricane Sandy. I didn’t really realize the Hurricane hit West Virginia but that’s the excuse. Anyway, we’re very frustrated to say the least and we’ve been told this will be the first week of December so all we can do is listen to them and hope it works.

Operator

Your next question comes from Jeffery Hayden – KLR Group.

Jeffery Hayden – KLR Group

Just a couple of follow ups on the financial stuff for you Ron. First of all, on the debt, the $175 on the revolver, $450 on the bond, is it still $50 on the Eureka piece?

Ronald D. Ormand

Yes. Again, that’s non-recourse.

Jeffery Hayden – KLR Group

What’s the cash position at the end of the quarter?

Ronald D. Ormand

$22 million.

Jeffery Hayden – KLR Group

What was the outstanding on the preferreds?

Gary C. Evans

There’s 100 on Series C and what was it on Series D?

Gabe E. Scott

About 205 I believe.

Ronald D. Ormand

So it’s roughly 300 to 305.

Jeffery Hayden – KLR Group

Gary, on the cap ex number you threw out $325 to $350 is that just the upstream component or is that kind of an all in cap ex number?

Gary C. Evans

That’s only upstream.

Jeffery Hayden – KLR Group

What should we think about as far as additional cap ex to layer on that?

Gary C. Evans

You’re talking about for the midstream?

Jeffery Hayden – KLR Group

Yes.

Gary C. Evans

I would say probably minimum of $50 million. But again, that’s all self funded that’s not funded by the parent.

Ronald D. Ormand

We have the ArcLight commitment. Also, once the Mobley plant comes on we’ll start to generate quite a bit of cash flow and we’ll see a very large ramp. I don’t think that’s something really anybody out there is focusing on. Starting out around 100 ramping up quickly to 200 million a day which is going to throw off a significant amount of cash flow at the Eureka level. What it does is also allow us then to begin accessing our first lien credit facility which is at about 3.5%. We also have some alternatives. We have the ArcLight financing and we also have some other alternative cheaper cost financing to begin financing to bring the cost of capital for that area down. Then as you know, our goal is to get the company public by the second half of 2013.

Jeffery Hayden – KLR Group

Then one more for me, when you look at kind of the exit rate guidance of 18.5, how should we think about the oil/gas/NGL split in that number?

Gary C. Evans

The third quarter was 55% oil and 45% gas. We didn’t really have hardly any NGLs because we don’t have the plant up and running yet. There are a little NGLs in our Eagle Ford division but they’re minor. If you’re looking at the end of the year I’d have to believe you’d have to drop that back down to probably 50/50 and that mix of NGLs, is I don’t know maybe 5%.

Ronald D. Ormand

I think actually it will be closer to 55/45 and about 5% NGL if we didn’t have the wells coming on it would be about 60/40 so that’s going to back us off about 5%. But then we have also a 5% increase in NGLs so it’s only about 5% of our total liquid stream is what I’m saying.

Operator

Your next question comes from Ryan Todd – Deutsche Bank.

Ryan Todd – Deutsche Bank

A couple of quick questions and you may have said this and maybe I missed it, but the incremental wells, the incremental activity in the Marcellus that was the cause of the additional capital, were those wells that you were not earlier planning to drill and now you have? Is there any production from those wells assumed in the 18.5 exit rate?

Gary C. Evans

We accelerated drilling some wells in the last three of four months to be able to have this big shot of production at the end of the year. So we’re fracing more wells than we anticipated fracing in 2012 that would have carried over into 2013. Now, the wild card for us between now and the end of the year is weather. This part of the country you know does have snow and wet conditions but as we sit right now everything seems to be going well and we’ve already fraced wells and have them shut in so turning wells on after they’re fraced is no issue with the weather.

So it really just boils down to getting the plant up and going and then we can turn these new wells on. There will likely be a really nice boost in the first quarter as well because not all of these wells will make it by 12/31 and some will be coming on mid to late January so the first quarter should have a nice boost as well.

Ronald D. Ormand

I think also we drilled some wells in the first quarter, we had capital allocated to the Marcellus, we drilled four wells. We completed them but didn’t frac them. We’ve left them there and now we’ve come back to frac those wells. When we put out the 18,000 barrels a day guidance it included those three coming on at the end of the year but we feel very comfortable about hitting that number even with what we have just in our pure liquids plays.

Ryan Todd – Deutsche Bank

Then finally, I know it’s a bit speculative at this point but since we were talking about 2013 cap ex, if you were to go ahead and monetize Eagle Ford let’s say, would that cap ex budget necessarily change or would you just divert what would have been the Eagle Ford’s cap ex into the Marcellus and Utica? The $325 to $350 level, is that kind of the level you want to stay at or is that dependent on what assets you have?

Gary C. Evans

It’s a good question. Obviously, it depends on the price we get and we have a price in mind that we believe we should be getting so what I would say is we’d like to redeem some of our preferred, our 10.25 Series C redeemable. So reduce our borrowing costs and so have sufficient cash available to fund whatever our cap ex needs may turn out to be in 2013. So I think it’s safe to keep this $325 to $350 number in your mind. If we do the monetization of the Eagle Ford we’ll use that money to pay down a substantial amount of our debt and be well positioned to look at how that cap ex may or may not change in the latter part of the year.

Ronald D. Ormand

We will be reallocating it in our existing plays more than likely but how we reallocate it is not something we’ve determined.

Gary C. Evans

Another thing, just to kind of remind everybody, the Marcellus – gas prices have had a dramatic change in 2012. We were below $2 and we’re hanging around $3.50 now and that $1.50 movement is a big deal for us. Then you take on top of that the liquids extraction from the processing plant when it goes live and we’re in a $5 regime up there. So $5 gas with liquids becomes very competitive with $85 oil. We feel like the opportunities for adding production and reserves really become substantial in the Marcellus and then we will be touching on the Utica.

We have our pipeline currently boring under the Ohio River that will come out in December in Ohio and then we’ll be ready to begin tying in new Utica wells. I think the market has given us zero credit for the Utica potential here and we think we may have some of the best Utica potential than anybody in the business. I mean, we’re just ecstatic. We’re drilling another horizontal Marcellus well right now in Ohio called the [Ormat]. It’s offsetting the [Ormat] we drilled about a year ago.

We believe this Utica potential that exists below our Marcellus, we’ve got two phenomenal zones and if we build a pad we can be drilling eight to 10 wells off a pad with two different zones. So our costs will really improve as we begin developing this and it gets pretty exciting, especially when you look at some of the recent wells at Gulf Port and Anadarko, [Entero] that have reported around our acreage.

Operator

Your next question comes from Neal Dingmann – Suntrust Robinson Humphrey.

Neal Dingmann – Suntrust Robinson Humphrey

A question on the Utica midstream that you were talking about, can you gives us an idea, I know you’ve talked about the pipeline going through, an idea of sort of capacity that’s going to be run there and just how big, because as you said, I just don’t think the market is understanding the full size of your entire project there so if you can give me a little color on that?

Gary C. Evans

The pipe we’re laying under the Ohio River right now it’s 20 inch pipe so it has a capacity to move 200 to 350 million a day with compression. We recognize that we’re likely going to have to put our own plant in Ohio. We’re having discussions with a number of different midstream companies about that. We will be the first over there with a line and we this time will be an equity owner of a plant. We’re never going to allow another third-party to control our destiny again. I didn’t want to do it this time and then I got talked into and now I’m kicking myself. But, we will control and be involved in the plant on the Ohio side.

So obviously, there needs to be a little bit more drilling done but the results, as you’ve seen then Neal look phenomenal and most of the lines that we’re laying in Ohio now are actually three lines in a ditch. We’re laying a dry gas line, and a water line, and a liquids line. So the terrain in this part of Ohio is really bad, very difficult so if you’re a first mover over there and spending money like we’re spending laying pipeline it’s going to give you all types of opportunities. That has already resulted in a joint venture that we’ve been negotiating with a private company that has a nice acreage position adjacent to us where we’d go in 50/50 and gather their gas, and drill the wells, and do a similar type JV that we did with Stone. Having this midstream asset is a huge advantage to us because it gives us upstream opportunities we wouldn’t have otherwise.

Neal Dingmann – Suntrust Robinson Humphrey

Just one last one, just as far as given the potential you have I think both midstream and upstream, why not bump up the activity a little bit and try and get another Utica well online to start tying in when that pipeline is ready?

Gary C. Evans

Those discussions go on almost weekly. We’re likely to have more Utica tests than what people think. I don’t really want to say yet what they’re going to be because we’re trying to be smart about it and we don’t like drilling wells and keeping them shut in. That’s not really our deal, we like to drill a well and produce it. So I think you’ll see a lot more Utica activity by Magnum Hunter in 2013 than what the market believes.

Operator

Your next question comes from Irene Haas – Wunderlich Securities, Inc.

Irene Haas – Wunderlich Securities, Inc.

Maybe we could step back and take a look at your two monetizations? You’ve got Utica going on and then also you’ve got Eagle Ford and probably later on you would have something with Eureka Hunter and at some point you’ll probably clean up your balance sheet. Can you kind of walk us through the timeline as to when these projects would be sort of completed? What are you targeting?

Gary C. Evans

Well I think we’ll know kind of where we are on the Eagle Ford by the end of the year, so the end of December. I don’t think we’ll know where we are on the Utica until probably January/February. If we get the kind of number we’re hoping to get out of the Eagle Ford we may not do a JV in the Utica, we may just keep it all. It just depends on where we are at the time. One thing for sure, we’re planting some tremendous seeds. We’re spending the time and effort meeting with all these foreign companies and we’re setting ourselves up for future relationships whether they’re in the Utica, the Bakken, the Eagle Ford, or whatever they are. We’re teaching a lot of foreign companies who Magnum Hunter is and what we’re doing and the response has been overwhelming.

So I think the time and effort we’re spending is going to really pay off in spades down the road. Eagle For first, Utica second and possibly a third transaction first or second quarter related to another play. We recognize that we’ve levered up the balance sheet, we’ve got tremendous assets and now it’s time to begin monetizing some of them and that’s why the Eagle Ford makes the most sense. We have a finite amount of acreage, we’ve had some of the best success in the play, we’ve got 33 wells producing and continue to put on 1,600 barrels a day wells and that’s very appealing to a lot of different companies.

We need to put those properties in the hands of somebody that has a lower cost of capital than us. It’s a mature asset for us, it’s an immature asset for other companies. I think the timing is really good and I’m just kind of blown away that the market doesn’t recognize the true value of these assets that we have.

Irene Haas – Wunderlich Securities, Inc.

To follow up, Eagle Ford has been going for $20,000 to $30,000 per acre. What is your expectation?

Gary C. Evans

I would say that we’re in that range.

Operator

Your next question comes from Stephen Berman – Canaccord Genuity.

Stephen Berman – Canaccord Genuity

Staying on that Eagle Ford theme, just remind us is the [Aticosa] acreage not part of that? And can you update us on the [Purisol] well?

Gary C. Evans

The current information that we’re showing to participants in the data room does not include the [Aticosa] acreage. If somebody pays us enough money they can have it all but we see a lot of value in the [Purisol]. There’s been some nice discoveries around us and our geologists have pretty much mapped the trend. At this point it’s not part of the divestiture.

Stephen Berman – Canaccord Genuity

What was the share count used in the Q3 numbers, average share count?

Ronald D. Ormand

168 for the third quarter, for the nine months it’s 151.

Stephen Berman – Canaccord Genuity

One more cap ex question, is any of the increase from $375 to $410 can that be tied to the Viking acquisition? I’ve got to assume since you have that and didn’t [inaudible].

Gary C. Evans

A small piece of it unquestionably but it was predominately from organic growth. I mean, if you look at the Viking acquisition we reported production numbers and they were minimal so it was predominately an acreage buy and it’s pretty hard to get borrowing base on an acreage buy these days.

Stephen Berman – Canaccord Genuity

I’m not asking about the borrowing base I’m asking about the cap ex.

Ronald D. Ormand

Cap ex actually Steve I would say that would be putting more in the Marcellus liquids area.

Gary C. Evans

Which did not relate to Viking at all. We haven’t drilled a well on the Viking properties and don’t anticipate this year at all, it will be 2013.

Operator

Your next question comes from [Yiktat Fung] – Jefferies & Company.

[Yiktat Fung] – Jefferies & Company

I was just wondering in terms of the Eagle Ford transaction, the participants there that are coming to you, can you give us a flavor of what kind of people are looking at these assets in Eagle Ford?

Gary C. Evans

I would say very few foreign, mostly domestic companies and much larger companies than I anticipated. There are certain companies that have announced that they wish to get into unconventional resource plays and have sort of blunted their sword in doing so. So this is a perfect type of transaction that gives them a possibility to build a base. Also companies that are mid cap that are predominately gas looking for oil, that’s another example and then companies that are close to us. You can look at a map and figure out who is looking at us.

There are people that do not have any Eagle Ford and people that have Eagle Ford that want to expand their Eagle Ford position. So it’s really a combination of all but very few foreign, mostly all domestic companies.

[Yiktat Fung] – Jefferies & Company

Just a couple of cap ex clarification questions, in terms of the $35 million increase for Appalachia, I think in the old cap ex guidance you guys had budgeted something like $25 million for five net wells. Now that chunk is basically more than doubling. Can we kind of assume the amount of activity planned for this year is also doubling?

Ronald D. Ormand

It’s not quite double, I think it’s about 40. We have four net 100% and the other five are 50%.

Operator

Your next question comes from Richard Tullis – Capital One Southcoast, Inc.

Richard Tullis – Capital One Southcoast, Inc.

I think most everything has been covered. I guess the final thing I would ask is what are you looking for, for a reserve number at year end?

Gary C. Evans

Well, that’s a very good question. There has been some recent discoveries in the Williston basin that we have made with our partner and this is in the middle Bakken in an area where we only had booked [inaudible] and Three Forks and we’re very excited about what we’re seeing and the opportunity for reserve bookings. The question is how much of that can get booked at 12/31 versus June 30 next year.

I will say this, we have had enough middle Bakken discoveries in the Williston basin now that could potentially double our reserves in the Williston basin. Now, is that going to happen at year end? No, I don’t know what percentage of that we’ll be able to book but we do anticipate some nice reserve bookings and as we get these new wells in the Marcellus on they set up additional puds, I think there will be minimal bookings in the Eagle Ford. We booked most of what we can there. We actually are drilling some puds now so the bookings for 12/31 will be predominately Williston basin both [Sasquatchian] and North Dakota and in the Marcellus. We won’t have a Utica will drilled yet so we won’t be able to drill Utica.

So next year I think you’ll see some nice bookings in the Utica as we start drilling those wells as well. If you want more color on the middle Bakken stuff we’d be happy to give you that in more detail but one of the reasons we bought [New Lock] and one of the reasons we bought Baytechs is we anticipated that there’d be additional new bookings in middle Bakken which was an area the street has given no value to. We’ve now had those discoveries, they’ve been much better than we anticipated and now we’ll have the opportunity to have some significant reserve bookings.

Operator

Your next question comes from Kyle Rhodes – RBC Capital Markets.

Kyle Rhodes – RBC Capital Markets

I wonder if you could speak to the field services division. I noticed you had a loss there in the quarter and if you can provide a little more color on that please.

Gary C. Evans

That’s predominately our drilling rigs. We had a period during the early part of the third quarter where we had basically everything in the yard and then all of a sudden in 30 days it completely changed and we had everything out. So I think it was just an anomaly. We have currently two drilling rigs on a learn term contract with [HUT] up in Pennsylvania and West Virginia. We bought a new rig and moved it down to the Eagle Ford and it’s working for Magnum Hunter or Eagle Ford Hunter drilling wells down there as well as disposal wells. Then we’ve ordered a new rig which we’ll take delivery of around the middle of January that will begin drilling our Marcellus wells up in Appalachia.

So the anomaly there on the oil field services is we had in the prior quarter a contract with a third party company where they said, “Hey, take your rig back and we’re just going to pay you.” It was a big payment, it was a couple million bucks so you saw an abnormally high number in that quarter and then we had all the rigs down for about a month and now everything is out. So I would just say it had to do with timing.

Ronald D. Ormand

It is also transitioning some of the rigs down to South Texas.

Gary C. Evans

Yes, we lost about 60 days moving the rigs down there and then getting it equipped with the mud pumps and everything so it could work Eagle Ford.

Operator

Your next question comes from Irene Haas – Wunderlich Securities, Inc.

Irene Haas – Wunderlich Securities, Inc.

Very quick I just wanted to talk about the MarkWest plant again. Just hypothetically if the start dates slip into the new year, 2013, I was wondering if you would still be allowed to big book your liquid in the Marcellus? And I think you mentioned earlier that your exit rate of 18,500 barrels of day are still intact regardless, can you please confirm?

Gary C. Evans

I think it all depends if Dominion could take our gas or not. The problem that we have had over the last six to nine months is the Hastings plant where all our gas currently goes is maxed out. They’ve been making improvements to that plant to increase the ability to take additional gas and so it all depends on whether they could take that additional gas. I believe we’re so closed to getting this Mobley plant on that that’s not going to happen but you never can tell. There’s still a possibility that that plant goes live at the end of November, we’re just trying to be conservative and say the first week of December.

Irene Haas – Wunderlich Securities, Inc.

How would you [inaudible] I mean just hypothetically if it was January 1st would you still be able to book the liquids or are they a real stickler about it?

Gary C. Evans

Because we have a contract we’re able to book the liquids on the puds we’re just not able to book the liquids on the PBP.

Ronald D. Ormand

Yes, they’d be [inaudible] if we completed them and let’s say we were flowing them to Dominion – that’s a good question, the liquids portion we’re still not giving it the full uplift at Dominion, we’d get the gas – but what we’ve been able to do and certainly with working with our banks is they look at that obviously and if it’s off a day or two they’re going to take that into account when they do our redetermination.

Gary C. Evans

For those of you listening, I’m giving a speech in about 25 minutes here at the Stephens Conference in New York so we need to finish up and thank everybody for your time. We’ve spent about an hour talking about the third quarter numbers and we appreciate your confidence and look forward to our reports here over the next couple of months.

Operator

This does conclude today’s conference call. You may now disconnect.

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